At the top of the list of issues that irk many consumers is inconsistency. People like to be able to measure apples with apples when they’re evaluating products. It’s no different in the mutual fund industry, in which investors, fund managers and distributors all want one constant and reliable way of defining what constitutes a specific fund.

That is why the Canadian investment funds standards committee set about to standardize the classifications of Canadian mutual funds when it was formed in early 1998. CIFSC is primarily made up of mutual fund database firms, including those of newspapers.

The Investment Funds Institute of Canada, as the trade organization for mutual funds, has participated in one way or another with the CIFSC for some time. It took on a greater role last fall, when it created a liaison committee to provide better feedback to the CIFSC from the industry.

IFIC has taken a strong view that maintaining one single and objective standard for classifying funds benefits the industry and investors. The board of IFIC, whose companies represent more than 80% of the assets under administration in Canada’s mutual fund industry, unanimously agreed it is imperative for the industry to maintain a collaborative and transparent fund-classification process. Having a single classification system is essential to prevent any confusion among investors, advisors, fund managers and distributors.

The objective of only one classification standard was challenged recently when one of the CIFSC’s members, Morningstar Canada, announced it had issues with the organization and was leaving. The upshot: Morningstar will have its own system for classifying funds. IFIC hopes Morningstar will reconsider that decision and rejoin the group.

A single, transparent system provides clarity. An objective system provides stability. The CIFSC standards have both. They’re also standards recognized by the industry and regulators for objectivity and independence. The existence of a competing classification system is not acceptable to the industry.

There is plenty of room for value-added services from data providers. Some fund companies require more slicing of figures and data than others. In fact, IFIC would like to work with data providers to ensure that their needs are met and their work is recognized. But we all should be starting from the same place — the CIFSC standards.

Having a single set of standards and an easy-to-follow way of categorizing funds means a smoother time for the industry. They make it easier for managers to create new products and explain them to wholesalers, advisors and clients. They also benefit the media, which can show investors a single and unbiased set of fund classifications. The classifications make it easier for investors to understand how the categories work together and how funds are compared with each other. Clarity and transparency are expected by regulators, as well.

The CIFSC is finalizing an upgraded methodology that will make the classification process immediately understandable. A simple CIFSC flow chart supported by detailed category definitions will ensure there are no gaps. The chart will make the process of differentiating categories a smooth continuum with more than 30 easily determined categories and will make it easy to see how and why each fund is assigned its place.

The flow chart allows a fund manager to answer “yes” or “no” to determine the category in which a fund should reside. As an example, the equity funds chart puts a fund through a series of tests — determining subjects such as percentage of Canadian content, average capitalization and whether a fund had income distributions — so the fund can find its rightful niche.

The revisions, in addition to being clearer to everyone, greatly improve the transparency of the process of categorization, enhancing the stature of the CIFSC process as an objective set of measurement standards.

It is the kind of clear and objective standards that the industry is proud to stand behind. IE



Joanne De Laurentiis is president and CEO of the Investment Funds Institute of Canada.